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Saudi Economy Starts to Recover as Oil Output Rises

Saudi Arabia’s economy began to recover in the first quarter of 2018 after shrinking for the first time in eight years during 2017, official data showed on Sunday (1 July), and the recovery looks set to accelerate in coming months with a rise in oil production.

Gross domestic product, adjusted for inflation, grew 1.2% from a year earlier in the first three months of 2018, the government’s statistics agency said.

GDP had dropped from a year earlier in every quarter of 2017 as a global price-supporting agreement among oil exporting countries caused Saudi Arabia to cut back its crude output. For the whole of 2017, GDP shrank 0.7%.

The impact of the oil deal faded at the start of 2018 after Saudi Arabia completed the required cuts. This allowed the oil sector, which comprises over 40% of the economy, to grow 0.6% from a year ago in the first quarter — a big contrast to its 4.3% decline in the last quarter of 2017.

In the next several months, Saudi oil production is set to expand. Global producers agreed last month to boost output by a combined 700,000 to 1 million barrels per day, and as the world’s biggest crude exporter, Riyadh may account for the lion’s share of the increase.

U.S. President Donald Trump said in a tweet on Saturday (30 June) that Saudi Arabia’s King Salman had agreed to boost output by as much as 2 million bpd to offset anticipated losses in production by Iran, which faces U.S. sanctions, and Venezuela.

Analysts think such a big jump is very unlikely. But Monica Malik, chief economist at Abu Dhabi Commercial Bank, said she was conservatively assuming a rise in average Saudi output of 500,000 bpd in the second half of 2018, which would be a year-on-year increase of about 5%.

Supply disruptions elsewhere in the world could cause Riyadh to lift output even more, Malik added, predicting overall Saudi GDP growth of 2.1% this year, led by the oil sector.

Many non-oil businesses in Saudi Arabia are struggling under the weight of austerity steps designed to cut the government’s big budget deficit. A 5% value-added tax was imposed at the start of 2018 and domestic fuel prices were increased.

As a result, Malik predicted only modest non-oil GDP growth of 1.8% this year, up from 1.0% in 2017.

“To some degree we’re likely to return to Saudi Arabia’s old model of growth this year, with rising oil exports feeding through into the rest of the economy,” she said.

“Structural reforms to create other sources of growth may have an impact in coming years, but don’t look like they’ll be in time to have an effect this year.”

The non-oil sector grew just 1.6% from a year ago in the first quarter of 2018, only slightly faster than 1.3% in the previous quarter.

Within that category the private sector, which authorities hope will create new jobs to bring down an unemployment rate of nearly 13% among Saudi citizens, inched up just 1.1%, faster than 0.4% in last year’s fourth quarter.

The construction industry shrank 2.4% from a year ago in the first quarter, showing builders continued to struggle with state spending curbs and corporate caution that have reduced the number of big new projects in the past few years.

The wholesale and retail sectors plus restaurants and hotels shrank 0.5%, suggesting Saudi consumers curbed their non-essential spending because of the new tax. An exodus of hundreds of thousands of foreign workers from Saudi Arabia due to the weak economy is also hurting consumer demand.